ANALYSIS: WestJet predicts turnaround in 2019

05 December, 2018

SOURCE: Flight Dashboard

BY: Jon Hemmerdinger

Boston

Executives at Canadian carrier WestJet expect the company's unit revenue will tick higher in 2019, kicking off a broad financial turnaround for a carrier that has struggled amid a business transformation.

Several ongoing revenue-boosting efforts, technology investments and a decision to reign in capacity growth will help the Calgary-based company recapture the higher profit margins that have evaporated in recent quarters, they say.

"We see 2019 as being a big pop… back to normal levels," chief financial officer Harry Taylor says during an investor conference on 4 December. "We believe our earnings growth will substantially accelerate after a very tough year."

That same day, the company took the unusual step of issuing full-year unit revenue expectations: it predicts 2019 revenue per available seat mile (RASM) will increase 2-4% year-on-year.

"We don't traditionally do that, but I thought it was important… because we are committed to getting unit revenues growing again," Taylor says. "We've got the initiatives in place."

Taylor concedes WestJet will not achieve a previously stated goal of a 13% to return on invested capital – similar to 2015 levels - by 2020. The company has now pushed that goal out to 2022.

Taylor was among several WestJet executives who sought to assure investors that the company remains on firm footing as it precedes with a broad transformation from a point-to-point low-fare airline to a complex network airline with global ambitions.

WestJet has recently funneled more flights through hubs, started building new airport lounges, begun adding business-class seats to Boeing 737s, partnered with a new regional carrier and ordered 10 Boeing 787-9s, which it intends to deploy on routes to Europe and, possibly, to Asia, executives have said.

But WestJet has struggled financially. In the second quarter it posted its first quarterly loss in roughly 13 years.

WestJet returned to profitability in the third quarter, though profits slipped 61% year-over-year, RASM declined and cost per available seat mile (CASM) jumped 5.9%.

"We have seen our unit revenues this year struggle," Taylor says.

WestJet's 2018 financial downturn results from several factors, including the threat of a pilot strike, heightened competition within Canada, the end of a codeshare agreement with American Airlines and a spike in fuel costs, says vice-president of revenue management and pricing John Weatherill.

WestJet also "underestimated the 787 startup costs", says Taylor. Those aircraft, which will begin arriving in early 2019, will have 320 seats, including lie-flat seats in business class.

The company has a plan to cut C$200 million ($151 million) in costs by 2020. It expects 2019 CASM, excluding fuel and profit sharing expenses, will be flat to up 2% year-over-year.

The company has also been curtailing growth, having recently cut fourth quarter expansion by six percentage points, to 5-6% year-over-year.

"We have taken a responsible… position on capacity management. There has been excess capacity in the marketplace," says chief executive Ed Sims.

Available seat miles on domestic Canadian flights jumped 5.6% year-over-year in 2018, according to FlightGlobal Diio data.

Though WestJet's available seat miles (ASM) will increase another 6.5-8.5% year-on-year in 2019, nearly all of those gains will come from deployment of new 787s on higher-yielding international routes and 737s operated by low-cost subsidiary Swoop, which can better compete on some North American routes, executives say.

They also outlined several revenue efforts they expect to pay off in the coming quarters. Those include the project to install two-by-two business-class seats on 737s – replacing a blocked-middle-seat premium product – and adoption of new technology to manage sales of premium seats, executives say.

In August, WestJet started selling bundled or "branded" fares – packages that include varying services like checked bags and seat assignments – on domestic flights. The company rolled out those fares on flights to the USA in October and is preparing to offer transatlantic bundled fares, says Weatherill.

"We are seeing substantial yield improvement in the fourth quarter of this year and our branded fares have been one of the key drivers," he says.

The company has also discussed forming joint ventures with Air France-KLM Group and Virgin Atlantic, both of which Delta holds partial ownership, and has ambition to form a joint venture with an Asian carrier, perhaps Korean Air, WestJet executives have said.